Coverage: S&P settles with government

Ratings agencies took a huge hit to their reputations after the financial crisis, getting the blame for misleading investors about the safety of investments. Tuesday, Standard & Poor’s settled with the Justice Department and state attorneys general for $1.37 billion.

The New York Times story by Ben Protess had these details about the deal:

Nearly a decade after credit ratings agencies became a symbol of a financial crisis they helped create, one of the industry’s biggest players faces a costly reckoning.

Standard & Poor’s, a ratings agency accused of inflating its assessment of mortgage investments that spurred the 2008 crisis, announced on Tuesday that it had agreed to pay $1.37 billion to settle civil charges from the Justice Department and from 19 state attorneys general and the District of Columbia.

The settlement, which does not require judicial approval, signals that the investigation of crisis-era misdeeds has entered a final stage.

The S.&P. settlement, on the heels of banks and other financial institutions collectively paying more than $40 billion to end federal and state investigations, was among the government’s few remaining items of unfinished business from the crisis. No other ratings agency has faced a Justice Department lawsuit, though prosecutors continue to investigate actions by Moody’s.

NPR’s story by Bill Chappell highlighted that the deal didn’t include an admission of breaking the law:

The deal “contains no findings of violations of law,” McGraw Hill points out in a statement released Tuesday morning. The settlements are not subject to a court’s approval.

The news comes nearly two years after the Justice Department sued Standard & Poor’s, “alleging that S&P engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs).”

In 2013, the agency said S&P’s desire to grow its own profits led it to give a false impression of complex securities that were a key element of the recent U.S. mortgage crisis.

Today’s settlements come less than two weeks after Standard & Poor’s settled charges of fraudulent misconduct filed by the Securities and Exchange Commission over its rating of commercial mortgage-backed securities (CMBS). The service paid more than $77 million in that deal, with the bulk of the money going to the SEC and the rest going to New York and Massachusetts.

Evan Perez and Ben Rooney wrote for CNN Money that despite saying the suit lacked merit, S&P was still the first ratings company to pay anything:

The suit was the first federal action against one of the country’s major ratings agencies, which have long been cited as key culprits in the real estate-fueled financial meltdown.

S&P had initially argued that the lawsuit lacked merit and suggested that the government was acting in retaliation for downgrading the United States credit rating in 2011.

Attorney General Eric Holder said the claim was “utter nonsense,” adding that the DOJ submitted millions of documents and that no indication of retaliation was found.

Time’s Bill Saporito called the deal “shady” since no one responsible was going to jail for their sins:

But S&P got off cheap and the fact that none of the people in charge of the company at the time are going to jail tells you it’s business as usual between Washington and Wall Street. It’s just a speeding ticket, people. Move along. The company was quick to point out that it wasn’t guilty of what it admitted to: “The settlement contains no findings of violations of law by the Company, S&P Financial Services or S&P Ratings,” the company’s press release asserts.

Nope, just a level of odiousness that still resonates eight years later.

S&P, part of McGraw Hill Financial, Inc. rates bonds for a living—it still does—and it was living well up to the financial crisis by rubber stamping its top, AAA rating to tranche after tranche of residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOS) from 2004 to 2007. The way this works is that the bond issuers pay the ratings agencies to rate them. No conflict there, right? Triple-A is the rating reserved for the best of the best. But RMBs and CDOs that S&P was rating were partially underwritten by the vast number of no-doc, “liar loan” and other mortgages being handed out by equally sleazy outfits such as Countrywide Financial.

Kaja Whitehouse wrote for USA Today that many were critical of the bargain:

“Penalizing for past offenses is always good. But we need a new system to prevent the problem in the future,” said Congressman Brad Sherman (D-Calif.).

“How can you be a tough grader when the way to make millions is to get a reputation being an easy grader?” Sherman said of the current system, which has sellers of debt and other securities also pay for their ratings.

The congressman, together with Sen. Al Franken (D-Minn.), have been pushing for the Securities and Exchange Commission to make changes that they say will reduce conflicts by forcing ratings agencies to rotate among firms issuing securities.

James Gellert, chairman and CEO of Rapid Ratings, a competing credit-ratings firm that does not rate mortgage-backed securities, also criticized the settlement as weak. “Ultimately, it’s unlikely to change much about the industry,” said Gellert, who has pushed for more competition among ratings firms.

Dennis Kelleher, president and CEO of Better Markets, a non-profit group that advocated for financial reform in the wake of the financial crisis, took issue with the fact that the deal didn’t hold anyone individually responsible.

“For what is allegedly years of egregious, reckless conduct, all the DOJ reportedly got was a big dollar settlement and big headlines,” said Kelleher. “Not one individual [was] punished.”

It seems that many are upset that the people responsible for the poor ratings and bad decisions aren’t being held accountable for their actions. The amount of money once it is divided among all the parties will do little to counter the amount investors’ lost during the crisis. As the critics said, settlements like these don’t do much to reform or actually punish those responsible – and the details are likely to fade quickly.